Budget 2013-14: An impossible balancing act

The tenor of the 1991 Budget was similar to India's first Budget of 1947. It will be interesting to see how “responsible” a Budget Chidambaram presents later today. Earn more and spend more — on vote catching schemes — has become the leitmotif of Budgets since 2004

Once upon a time, a balanced Budget was de rigueur for governments. Then along came John Maynard Keynes in 1936 with his fancy theories about the multiplier effects of deficits. And before you could blink, what had been a virtue till then — a balanced Budget — became a vice.

All over the world, the same thing happened. Governments (read politicians) and corporates winked at each other and got on with the job of perverting a well-meaning idea into a curse.

That curse used to be called the budget deficit. Then in the early 1980s, the IMF, which was a veritable financial King Kong then and not a weakling as now, enlarged the meaning. It began to include public sector borrowing also.

Thus was the term fiscal deficit born.

But there is no pleasure without pain. Now that governments had given up on balanced budgets — expenditure equals revenue — the IMF had to answer a question fit for one of the bramha rishis: What was the ‘safe’ level for the fiscal deficit?

No one knows how it did it, but soon 3-3.5 per cent of GDP became the magic number. At this number or below it, you were Menaka; above it you were Hidimba.

Rajiv’s legacy

As always, this news came late to India which is why when Rajiv Gandhi ruled India (1985-89), the fiscal deficit climbed to around 11 per cent of GDP, with predictable results.

By 1990, India had become a Super-Hidimba. Foreign capital flew out at lightning speed. By January 1991, India was well and truly broke.

It could not pay its bills, either to Indians or, even more shamefully, to foreigners. Lest we forget: that was Rajiv’s legacy, a bankrupt country.

Enter Manmohan

In the fraught summer of 1991, a new Congress government under P.V. Narasimha Rao sought to restore international confidence. It gave the finance portfolio to a career government economist-bureaucrat called Manmohan Singh and told him just do it.

So Singh devalued the rupee by 22 per cent, slashed export subsidies and abolished industrial licensing.

Then he presented his Budget.

Ordered to reduce the deficit to 3 per cent by a young man from the IMF (who, incidentally, has just become a deputy governor of the RBI), Singh bristled but got on with the job. He had no choice. India needed IMF money.

He slashed customs duties and excise duties; he rationalised taxes and gave foreign investment an unmistakable invitation saying the East India Company was now history. Indeed, the general tenor and approach of the 1991 Budget was remarkably similar to independent India's first Budget of November 1947.

But reform was not high on the Congress party’s agenda. Singh was bitterly criticised in the Cabinet. So vicious was the attack that he resigned over the issue. But his resignation was not accepted.

The rest of Singh’s Budgets, till 1996, were the usual fare and, by the time he left, the deficit had climbed back to around 6 per cent. In that sense, he failed in what he had set out to do: restore fiscal sense and order. Nor had he been able to use taxes to unleash what he had called the economy’s “animal spirits” in his first Budget.

The politicians had won, the economists had lost and Singh himself had joined the winning side.

Chidambaram’s chutzpah

And then in 1996 came a lawyer who knows everything. Called Palaniappan Chidambaram (PC to the media) he had quit the Congress over differences with Narasimha Rao.

He became the finance minister in a coalition government with Communists in it. That is why what Chidambaram achieved makes him one of India’s best finance ministers.

He took an axe to the tax rates to bring down the maximum rate of income-tax to 30 per cent, the corporation tax to 40 per cent and the average level of tariffs to just a shade over 25 per cent. Those rates have stood more-or-less unchanged since then.

He also started the Minimum Alternate tax to deal with the zero-tax companies. With just one Budget, PC changed the way India ran its economy.

But his government soon fell and he was followed by Yashwant Sinha. A new BJP-led coalition came to power in 1998 and started off on the wrong foot, with Sinha looking to the public sector to pull India out of the investment famine that had started in 1996.

Over the next five years, he increased the scale of public investment hoping there would be pull effect on private investment. But that was not to be.

Five long years would pass when in 2003 investment would revive on the back of low interest rates. The Budget and fiscal policy would take the back seat henceforth and it would be monetary policy that would drive investment and growth.

Many things had changed in the decade since, thanks to Rajiv Gandhi, India went bankrupt but one thing did not change — the fiscal deficit. It stayed well above 5 per cent. Sinha presented five Budgets between 1998 and 2003 and failed as spectacularly in this regard as Manmohan Singh had.

Then, following some internal moves within the BJP, came Jaswant Singh. He was a no-nonsense former soldier who candidly admitted he knew little about economics.

But he did know one thing: low taxes and common sense make everyone happy. As the Budget editorial for 2003 in this newspaper noted:

“Mr Jaswant Singh is instinctively betting on lower taxes and duties pulsing an economy trying to surface from a deep depression. Growth impulses have been premised around fiscal and monetary fillips for infrastructure, housing and agriculture turning on consumer and capital goods industries.

“As an overlap, some significant tax concessions have been put in place to help citizens splurge a bit to arrive at an 8 per cent GDP growth.”

Combined with low interest rates and a pat on the back from the US, investment finally revived. By 2008, India was investing 38 per cent of its GDP, a record that led to its touching 9 per cent growth.

But that was all in the future.

PC Redux

In 2004 the Congress came back at the head of a left-leaning coalition. PC came back as finance minister and presented a series of workman-like Budgets between 2004 and 2008.

His main contribution during this period was to shift spending priorities in favour of agriculture and the small-scale sector. The tax-GDP ratio rose from 9.2 per cent in 2004 to 10.2 per cent in 2006 and the fiscal deficit came down to 4.1 per cent. But such were the demands to spend that he increased the service tax to 12 per cent and widened the net in view of the sector contributing 54 per cent to GDP. But he did lower peak customs duties to 12.5 per cent from 15 per cent, helping India globalise.

The results were dramatic, as we noted editorially: “A blistering pace of growth of over 9 per cent in the past two years, and an average of 8.6 per cent for three year… the nation has been spellbound by the numbers that wove a magical story.”

Earn more and spend more — on vote catching schemes — has become the leitmotif of Budgets since 2004. But as always happens with a spendthrift, spending more becomes such an addiction that even when earnings decline it becomes difficult to cut spending.

This is what has happened to India since 2009. It will be interesting to see how “responsible” a Budget PC presents later today.

Will he, like Javed Miandad, hit a six off the last ball or will India run into another balance of payments crisis by the end of this year because PC lost his nerve?

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Comments:

what you are trying to say TCA. It puzzle me...

from:
sanjay

Posted on: Feb 28, 2013 at 00:03 IST

The problem with P. Chidambaram (FM) is that he invariably takes the path of least resistance at budget times. He never bites the bullet, taken tough measures. Would he ever reduce subsidies on agriculture, on fertilisers, abolish free electricity? Never. Not for him any new, innovative, path-breaking, trail blazing new initiatives. Taxing the middle class, the captive tax payers (aka the salaried class) and the helpless is his forte. Recall the introduction of service tax (double taxation thru the back door), STT, withdrawal of standard deductions, taxing the few perks the salaried class used to enjoy, tax on banking services, the proposed EET (exempt, exempt, tax) proposals, and many more such impositions. The retired, non-pensioner middle class require immediate protection from inflation. Can he do *anything* about it?
Let us now see if he can change his "spots" - at least this time around.

from:
Rupnarayan Bose

Posted on: Feb 28, 2013 at 07:34 IST

Acts for 9% GDP were started before 2004by bjp (not by UPA),the result was visible during UPA Rule from 2004.Today's act and ideas will neither increase GDP nor reduce deficit immediatly, the real result will be visible well beyond elections in 201,i dont expect anything good from this failed govt.it will be all about winning election,history has shown congress policies are never mind nations tomorrow but we can always ,hope for the best.

from:
gvk

Posted on: Feb 28, 2013 at 11:37 IST

FM talked of mdoernising psot offices soson but he let go this opportunity at the budget to price a few things so that this budget generates the much needed revenue. Why wait for a long exercise of modernising for doing little things like pricing upwards slightly the postal cover, etc..